Thank you for your March 17, 1999, letter regarding the default aversion fee paid to guaranty agencies to encourage them to help delinquent borrowers avoid default. I appreciate the opportunity to hear your views on this issue.

You write on behalf of the American Association of State Colleges and Universities, the American Council on Education, the National Association of Independent Colleges and Universities, and the National Association of State Universities and Land-Grant Colleges. All four of these associations are represented on the negotiated rulemaking committee that is discussing this issue. Please feel free to share this response with them.

As you know, the Department's interim guidance to guaranty agencies on default aversion fees described the policy the Department would follow until the issue was addressed in the negotiated rulemaking process. That policy is designed to ensure that a guaranty agency is paid this fee when a borrower default is in fact averted, not merely postponed.

I recognize your concern that this policy could create some undesirable consequences for borrowers. Both in the interim guidance and in the negotiated rulemaking sessions, however, we have invited the guaranty agencies and other interested parties to suggest alternative proposals that would protect borrowers and taxpayers, avoid adverse incentives for guaranty agencies, and carry out the purpose and intent of the statute. I understand that representatives of the guaranty agencies have proposed an approach that is now being explored in greater detail and will be discussed further at the April negotiated rulemaking session. Assuming consensus is reached on an appropriate approach, the Department is prepared to amend its guidance prior to publication of the notice of proposed rulemaking to reflect the consensus policy concerning the default aversion fee.

Thank you for letting me know of your concerns regarding these issues. Please contact me if you have any further questions or concerns.

Yours sincerely,

Richard W. Riley

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